Fiscal Policy

Government Budget

This refers to the government’s financial plans in terms of planned revenues (mainly taxes) and expenditures (like healthcare or education).

Balanced, Deficit, and Surplus Budgets

Governments try their best to balance their budget.

Reason is because raising taxes isn’t favourable and taking loans for funding a deficit budget is highly expensive due to the interest for the loans.

Reasons For Government Spending

Reasons For Taxation

Tax is a government levy on expenditure or income. Government imposes taxes to:

Help redistribute income and wealth in economy by imposing taxes on salaries & profits.
To reduce output of certain demerit goods by imposing tax and increasing production cost.
To protect domestic firms from oversees rivals by imposing tariffs on foreign goods & services.
To fund governments spending and expenditure.

Tax revenues are spent in key areas like national defence, infrastructure, healthcare, educations, etc.

Before spending the tax revenues, the government must first take money from the taxpayers and other government finances (like loans).

Tax Burden

Tax burdens refers to the amount of tax households & firms must pay. Tax burden can be measured in 3 ways:

For Country: Calculating total tax revenues as proportion of GDP (Gross Domestic Product).
Individuals & Firms: Absolute value of tax paid or by amount of tax paid as proportion to their income/profits.

Classification of Taxes

Direct & Indirect Taxes

Taxation Types

Principles of Taxation

Impact of Taxation

Fiscal Policy

This is the use of taxation and government expenditure strategies to affect macroeconomic objectives.

Fiscal Policy Measures

Effects of Fiscal Policy on Government Macroeconomic Aims

Monetary Policy

Monetary policy refers to the use of interest rates, exchange rates, and money supply to control macroeconomic objectives and affect the level of economic activity.

Monetary Policy Types

Effects of Monetary Policy Measures on Macroeconomic Aims

Supply-Side Policy

These are the long-term measures to increase the productive capacity of the economy, leading to an outward shift of the production possibility curve by improving the quality and/or the quantity of factors of production.

Supply-Side Policy Measures

Supply-Side Policy & Macroeconomic Objectives

One Little Problem…

All the supply-side policies take a long time to start giving benefits. This is mainly because all these policies help in the long term unlike fiscal or monetary policies.